Posts Tagged ‘Austrian Business Cycle Theory’

An Energy and Carbon Monetary Unit: A Realistic Money to Replace Fiat Currency “Optimism”

Sunday, March 8th, 2009

Money is “a medium of exchange, a unit of account, and a store of value.”

However, absent from the view of Monetarists and Keynesians (and the “money” Wikipedia page), is an additional role for money, a role that’s given an important place by Austrian Business Cycle Theory. Money should be a measure of the aggregate of society’s savings– its future capacity for growth.  Unless someone tries to force it to tell lies, money, in its interaction with other goods, gives both the society as a whole and individual entrepreneurs a measure of the society’s ability to take on new projects (or not).

There’s a good reason why Monetarists/Keynesians won’t consider this.  A money that measures wouldn’t support their fantasies of what “monetary policy” is expected to accomplish.  To them, money needs to be a vehicle that government can manipulate to “stimulate” economic activity and create “optimism”.

Repeat that last sentence out loud once, and for most of us that’s enough to appreciate the fundamental dishonesty of the concept.  Still we could throw that out, stipulate to the erroneous “greater good”, and simply look at the effects after decades of manipulated money, credit and financial opinion– the “greater good” is itself in ruins.

The criminality (the Madoffs et al) is a red herring– only a fraction of the waste from a process that was natural and inevitable under artificial credit creation.  The Federal Reserve and the government got exactly what they asked for— if more and more credit is created, with more and more “stimulus” and “optimism” to get us all moving and spending, could there be any doubt that the average modern society will have no shortage of people willing to get “creative” in order to soak this up?  The exact path of the creativity is difficult to know in advance, but nothing will stop a party like that, other than the eventual clear vision by a critical mass of economic actors of the scary, unsustainable wasting of our limited resources.

Since it’s the normal and predictable side effects of fiat money credit creation, not spontaneous greed, random mistakes, or insufficient “stimulus”, that is the primary cause of these bubbly, wasteful financial disasters, what form of money could stop the cycle?

A gold standard ranks well on measurability– just flop it onto a scale and there it is– a measure.

And Monetarists generally don’t like gold, which you’d think would be a perfect recommendation.  However, while many Monetarists have used a need for monetary expansion as an excuse to be profligate morons, there’s a little kernel of real world worry at the twisted heart of the issue.  A gold monetary standard has an eventual problem– once the standard is generally established, the modern trend wouldn’t take more than a century or two before there’s a strain to find new sources of money, a strain that would continue ratcheting up until loans at interest become impossible. Someday, there would be “peak gold”.

It’s a distant flea of a problem compared to the immediate brontosaurus that Monetarists saddle us with daily.  However, a few centuries can pass surprisingly quickly (especially for the unborn, who have very little concept of time).

So we’re looking for a money that is non-static, but nevertheless a real measure of a society’s ability to create new goals and move forward, or conversely, would appropriately stall us out when we’re not ready.  We need a limitless limitation.

A few thousand years ago, a food backed currency– stored food, if absent the problem of spoilage– would have taken a good rough reckoning of a society’s future capacity.

Today we need to be able to do a lot more than eat in order to accomplish our work.  But I’d suggest that energy would be a good measure for today’s economies, since we need it in pretty much anything we do.  If we have sufficient energy stored to take on a project— it’s as safe as it can estimably be to take it on.  If not, then we know we’d get stuck with a half finished project and the waste and risk associated with that— we would have to wait.  (The way we needed to wait on “improving housing affordability”.)

We can also theorize that the payment of interest will never be a problem with an energy monetary unit.  Until we’re capable of building a “Dyson Sphere” enclosing the solar system, we won’t run out of energy potential (and who knows, even that might be a pit stop on the way to the stars?)

Is it a little odd to propose that we literally have money to burn?

Comparatively, no, it’s not.  How much stranger that for money we’ve chosen an unmeasurable paper standard. We measure anything and everything.  People have even tried to figure out if a human soul has weight, but for money, of all things, we’d rather pretend?  The one thing that we think we don’t need to measure is our savings versus our consumption– our stored capacity to use resources– our future on earth?  (If I didn’t know how inherently trustworthy government is, I’d suspect we were being manipulated or something.)

A currency that can be spent literally, or saved literally, is a chance to stop pretending that savings, or lack thereof, has nothing to do with our future.  A chance to uninduce the self-induced march of the bubbles.

Let’s go back to optimism for a moment.  As you can perhaps tell already, I’m not entirely a fan.

President Obama has “The Audacity of Hope”, but the implied rarity of hope in the political sphere is a little disingenuous.  The value of “optimism” is unquestioned in politics, especially if it’s yours.  You can pretty much imagine any president saying when criticized something like: “Look, any plan will be criticized, but I believe in optimism– you can’t always listen to the naysayers.”  (Maybe there’s a reason there’s always naysayers– maybe all the plans have sucked?  We are, after all, where we are, and didn’t get here overnight.  Every presidential plan is a central plan, with a clear theoretical basis for sucking.)

Optimism isn’t just the universal political habit of mind, but the most common in general.  Perhaps optimism deserves some of its boosterous reputation, but in the end as a mass state of mind, it can turn very quickly into an excuse for lazy thinking.  Money and economics in particular have been heuristically much too glib, and not to be too dramatic, it’s conceivable we could pay for it with our lives.

It isn’t only that we’ve managed to stupidly fool ourselves into underestimating the savings we need for our own not much more than day to day living, and then, what’s needed to have a future equal to or better than the past.  It’s not just that we’ve decided, out of nothing, that doing nothing is not an option, while spending trillions of dollars is a must.  (Mandatory trillions spent on something somewhere– we “know” it must be spent, but how, where, what– that we don’t know.)

To me there’s still much more, as long as we’re throwing our fiat currency habitual non-measurement of resources into the mix.  We also appear to be underestimating by many orders of magnitude the level of saving that we need to give us a near certainty of sustaining a human civilization indefinitely.

We’ve added a lot of dependencies in our modern system that haven’t even been tested by an historical sized natural disaster— a San Francisco earthquake, or a Krakatoa.  What about something many orders of magnitude bigger, which might have a very high probability over a period of a thousand years or so– the natural disasters that we know have happened in early or pre-history?  (If a thousand years seems like a long time, consider that that still gets a double digit percent chance that it would occur in the lifetime of yourself, your child, or your grandchild.)

These, along with potential manmade disasters (where perhaps rightly, many people would place even more emphasis), put us on the footing of “it’s a matter of when, not if”, a place that I’d contend we wouldn’t be if we had a hundred or so times our current savings.

(Say for example that most countries had started work on an energy currency system 50 years ago, had because of this perhaps developed more advanced energy accumulators, and now had the above type magnitude of real savings in energy.  Say further that tomorrow someone is able to prove that pollution caused global warming is real, with a best model estimate 90% certainty of ending modern civilization.  With that evidence, and those usable savings, then these countries would have potential to mothball most industry for a decade or more, working instead entirely on changing the outcome, rather than just waiting for a civilization ending catastrophe.)

A long, long time ago (in the title), I mentioned “carbon” in the monetary unit.

Now, I’ll carefully disappoint half the readers who were waiting for the good stuff, while providing (temporary) relief to the other half, who had probably been saying, “Carbon? Is this idiot one of those “cap and traders”?

To be continued in Part II…

By Les Lafave

Monetary and Banking Reform –

Bernanke Moves the Sun-Dried Fish (Fun With Austrian-Style Crusoe Economics)

Sunday, February 22nd, 2009

In this adventure of Robinson Crusoe, the writer is so bitter that he takes it out on innocent characters in his own imagination, meanly depriving Crusoe of tools, supplies and opportunity.

Seven hundredths of a second after Crusoe thinks, “I wonder if I could rescue some supplies from the ship?” it sinks almost instantaneously with a perverse Champagne cork popping sound, into a trench a thousand fathoms deep.

Fish leap and play daily in Crusoe’s sight, but too far off for hand fishing.  The giant dwarf coconuts are five hundred feet tall, but with mini-nuts that take ten minutes each to crack and yield one calorie.  The island’s unique tortoises can outrun him.

Scrounging for enough food to starve over years instead of days is an exhausting grind.  Crusoe can only dream of capital projects.  There appear to be sources for tool making, but always a little too far from food sources to consider risking.

The problem that Crusoe has, as delineated by many Austrian School economists, is that he must have savings in order to produce tools (higher order capital goods).  Without savings of food he has to continue as he is, hand gathering for subsistence.  Crusoe plans, estimates and saves a few scraps.

Then Friday shows up.  The two divide the subsistence chores and start to do a little better.

They work out a detailed plan– by the standards of the island, it’s a massive capital project.  It involves building tools, and tools for building tools, in assembly line fashion.  The savings needed for them to complete their capital project according to their estimate– a thirty day supply of food.

Crusoe has been maintaining a rather ambitious food storage cave. He shows this to Friday.  It contains some pathetic food scraps of surplus over subsistence– the space carefully organized for the bounty that never comes.

Friday, now with considerable excitement about the thirty day plan, examines the potential of the space.  After all this waiting Crusoe is also catching emerging economy fever, and so as difficult as communication is for them anyway, they’re both hasty, and tragically fail to understand each other.

Friday thinks that Crusuoe is showing a food storage cave prepared for Friday to store Friday’s surplus.  Crusoe had only intended to convey that Friday should prepare a similar larder.

The two men dive into the tasks of hand gathering food, sometimes working together, sometimes apart, in accordance with the master plan.  When they work together, Crusue makes sure to leave half the production outside the food storage cave for Friday to move to his own larder.  Friday is a little puzzled by the extra work that Crusoe keeps leaving for him, but doesn’t wish to confront his friend, and so simply moves the food into the same cave later.

When Crusoe’s tally indicates that he has thirty days supply, he asks Friday what help he needs with finishing his supply, and is amazed at Friday’s indication that everything’s finished.  Both men are so elated that the savings plan went better than they’d dared to imagine, that they even expand the tool building plan.  They dive in with a near delirium of hope and ambition.

They’re so excited and work so hard over the following days, that their savings are almost depleted before they realize the error.

The more they look at it, the more sobering the disaster begins to appear.

Without adequate saving to deal with all of the plan’s dependencies, it has turned into a trap.  None of the tools on their assembly line are more than half completed.

A lot of the early production went to make fresh vine lashings.  These lashings need to be in place on the constructed item within a few weeks at most, or they become useless.

A half completed fish weir will wash away without ever endangering a fish.  They become despondent as they look at the same picture everywhere– it looks like some aggressively inattentive kids have been playing– half dug pits, trampled brush, scattered rocks, chopped trees.

How could they have been so foolish?

As a matter of fact it’s pretty easy.  Crusoe and Friday have just engaged in an accidental experiment with fractional reserve banking, absent the banks.  Perhaps (since most central bankers have magic powers), Ben Bernanke was even there, sneaking in to rearrange the supply cave to make it look like the savings were abundant for a little longer so as to protect the illusion of growth.  Regardless, Crusoe and Friday both perceived that the same savings were available for their particular use.  The illusion lasted until they realized their mistake, and then their economy crashed.

As Crusoe and Friday try to re-capture their subsistence methods, there’ll be further depressing damage assessment as they see how much of the low hanging fruit, in some cases literally, they’ve stripped away.  The assumption had been that the completed capital projects would more than make up for any lack of care and husbandry during early stages (something we duplicate in real life bubble economies).  For Crusoe and Friday, it may be a more serious issue than just wasteful projects– the upcoming time of malnourishment may kill them before they can regain their footing.  (From that perspective we can also see that the quicker the crash came to their economic boom, the better off they would have been.)

Of course they note a radical difference in work energy from the period of boundless hope, to that of seemingly bottomless despair.  But noticing it won’t entirely cure it. (Rather similar to the way it’s useless for some idiot financial analyst on TV to decry that consumers are turning their pessimism into a self-fulfilling prophecy by failing to spend and/or borrow.)

Both “Crusoe Economics” and identification of the bubble inducing problem of credit expansion are traditions of Austrian Business Cycle Theory.  I’ve borrowed particularly from economist Jesús Huerta de Soto for the above Crusoe and credit adventure.

But since I’ve personally found a sarcasm engendered catharsis to roll back the bitter tide for perhaps even as much as a full day, it’s at this point, while Crusoe and Friday have their heads in their hands, that a disoriented whale beaches next to them, and before they can recover from their astonishment, a lightening bolt knocks over and flames a dead palm, creating an impromptu barbecue pit.  (In the roots of the flaming palm, the two discover more than their collective weights in plump, wild sweet potatoes, with a scattering of wild herbs.)

Great rejoicing.

A barbecued whale for our sliding economy, however, absent an intervention from an advanced alien culture, would seem to have a problem of scale.  Too many credit bubbles have been layered on top of each other.  There’s nothing Fed Chairman Bernanke can do, with money or fish, to hide the waste anymore.  Credit expansion from fractional reserves– credit money out of “thin air”– must always leave us high and dry (and whaleless) at some point, but as perverse as it may seem, the sooner the better.

By Les Lafave

Abolish The Federal Reserve –

A Credit Collapse, Not a Financial Panic

Sunday, October 5th, 2008

If public officials herd beach patrons into shark infested waters, and start chumming, and then after the first shark bite the patrons start to scream and flail about trying to escape, thus causing more drownings than shark bite hemorrhages– we’d properly be more apt to label this stupid or criminal, than call it “a panic” on the part of the beach goers.

Our financial crisis has a lot in common with the above shark feed.  Although the results from the credit collapse may seem insane, confusing, and scary– they’re really the normal expected result of government directed money and credit expansion.

Austrian Business Cycle Theory, which describes the reasons for the inevitable downside to artificial expansion, suggests that our benighted government’s thrashing around to try and thaw the “credit freeze” (and which seems like the real panic, if there is one), is only treatment of a symptom and can’t succeed.

This is not just about people not trusting each other– a credit freeze, or a “liquidity trap”, that makes stimulus ineffective.  This is about a growing realization that there are not enough resources available to complete or use all the unfinished and/or uneconomic projects out there over a timeframe that would make them economic– a realization that projects and their owners must now fight for their lives. Now, because of the over invested position that credit expansion has put us in, and unlike a “normal” economy, this is a zero sum game– one project or company’s life may well mean another’s death.

In other words, the “fear” and “distrust” in the markets should probably instead be called logic.  The Fed and the Treasury can do whatever they please, pump in or not pump in any amount of “liquidity”, buy or not buy any assets, whether trashy or public profit making, or both.  Restoring trust or liquidity is not the key issue, and is at any rate impossible in this environment.

The credit collapse is about too much investment, and investment in the wrong things (as Austrian Business Cycle Theory calls it, “malinvestment”).  Business has recognized the malinvestment (finally), and it can’t be unrecognized.  The Fed and the Treasury are frantically trying to throw in more resources to fog investors up again, but as the expression goes, they can only throw good money after bad, to distribute and ultimately deepen and extend the pain.

To sum it up in short, brutish nastiness: there is no fix other than time, depreciation, and failures.

It’s not likely that President Bush will call a press conference to talk about economic policy, and say, “My fellow Americans, I’m announcing today that this is not an aberration; in view of what we’ve done, this is normal.  Unfortunately, there’s too much rationality in the markets. Failures are an option.”  If he did, then after a brief stunned pause while people decide if they’re frightened because they can’t believe the statement, or because they can, everyone would of course take the only logical course, and scream and run in circles.

Whatever happens (with or without fantasy honest press conferences), panic will get an irrationally large share of blame.  In the too convenient world of ever unevolving politics, panic is an easy scapegoat.  As in, “Obviously, if it wasn’t for that darn panic, the Feds would have had everything under control the whole time, so let’s just go back to the way things were.”

If that attitude gets as much traction as it’s starting to look like it might, then the subject of real monetary reform and real banking reform will slip off the table in a puff of snake oil (the way it always does).  What a tragic missed opportunity to add to the tragedy list.

By Les Lafave

Banking Reform –